Will My Tax Debt Go Away if I File Bankruptcy?

I am frequently asked if taxes will 'go away' when someone files bankruptcy. The answer is that they MAY go away. Many other bankruptcy law firm sites simply tell you that taxes don't go away in a bankruptcy; that advice is probably coming from bankruptcy firms that don't want the extra work of advising you regarding your tax debts.

Here’s the deal on whether the taxes go away or not. You can discharge income taxes a) if the returns were due more than three years ago, b) if you actually filed the tax returns at least two years before the bankruptcy, and c) if the tax has been assessed for more than 270 days.

There are several circumstances that stop the above time periods from running. If you filed bankruptcy before, those time periods are stopped for the duration of your bankruptcy. If you filed an offer in compromise with the IRS, that too will stop those time periods from running.

Also, when the IRS gets impatient with you for not having filed your tax return, they can file one for you (i.e., a "substituted return"). They guess how much you owe based on W-2s or 1099s that have been filed for you and they do not give you any breaks in preparing your return (big surprise). If the IRS files a substituted return for any tax year, you can’t discharge that year’s tax (unless you live in the 6th Circuit; there is a split among the circuits on that issue).

Most clients will not remember exactly when they filed and virtually no one knows when a particular year's tax was assessed. You can call 1-800-829-1040, wait on hold, and then ask for an "account transcript." Or better and quicker, you can visit the IRS at one of the local IRS branch offices and just ask them in person for your transcript.

By the way, note that I started this page by talking about "income taxes" and not employee withholding taxes, trust fund taxes, and/or 941 taxes. You owe trust fund taxes on money you withheld from your employees’ paychecks and then did NOT send in to the IRS. The IRS considers those withheld funds to be money that you stole from the IRS. Not surprisingly, those taxes do not go away in a bankruptcy.

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The Law Office of Matthew D. O'Conner is dedicated to helping clients file bankruptcy while retaining their dignity and pride. We provide assistance, legal counsel and advice and will be able to answer your bankruptcy-related questions and help you file a Washington bankruptcy.

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